“The Charts Precede the News”

Most of my “67 Rules To Successful Stock Trading” are based on finding diamonds in the rough; the overlooked stocks that other traders have given up on or are just too suspect to try. This past Thursday I saw just such an opportunity with ISRG. So much bad news was built into the stock and it had failed to participate in the recent overall rally. It was set to open near a recent 52 week low and honestly the kind of stock I normally want to short; but the charts told me otherwise.

Three months prior; the stock had taken a late day $100+ tumble on some questionable news that’s not worth mentioning; all you need to know is that it fell on news and then recovered most of the loss quickly and since has been selling off in a negative but choppy downward pattern. I had posted a chart on ST a few days before the big drop and mentioned along with the chart that it was ready for a pullback. At that point the stock was at a new high and my chart showed a long-term resistance third test near the last price. The way it had slipped into the Bollinger Band signaled to me that it had some possible trouble ahead. And as it turned out I was right; but at the same time I found out I was also very wrong; or to be more exact my chart was wrong. It as off by more than $3 according to the point from which the big drop started so I began plotting over again and have had the stock on my radar ever since.

About two weeks ago I found my mistake based on another recovery point from which the stock made above the Bollinger Band. But more importantly the way it acted while above the Band; eliminating multiple resistance lines as it proceeded higher; really raised my eyebrow. You see; good technicians not only realize a stocks support and resistance boundaries; they also understand the “motives” behind each move which goes directly to the psychology and setup of a possible great trade well down the road.

You need to understand that money in the market flows; it needs to keep working; it never rest. So when I saw the overall market topping on the SPY and QQQ I knew it had to find another home; at least for a few days.

Last Thursday was that point for ISRG. A third test on long-term down-sloping support was set at $465; right near its yearly low; a level it had already tested twice within recent weeks and a spot where short sellers would feel confident that it would fall from if tested again.

I saw it differently only because I know “The Charts Precede the News”. My opinion here was that all the bad news was already factored into the stock and that strong 3rd test was also very clear; but what really peeked my interest was the fact that others probably didn’t realize either; plus from studying the stock I understood the personality of the stock and that it liked to reverse hard and run big on Thursday and Fridays. For me the perfect storm was in place and I was prepared last Thursday when the market opened to take full advantage of it. My chart told me where the next real resistance was up near $523; so I decided to buy a few hundred $485 and $490 calls soon after the open. Too my surprise I was the only one making a bid and within 10 minutes of the market’s open ISRG and fallen right to my support; down $5 from where it reversed quickly to go positive; a trend that it continued for the rest of the day.

The stock stalled around $480 early in the morning and made a few dips to draw in some short sellers as the overall market was in full sell-off; but the action had confirmed my chart because the low point third test price was only hit once and the stock moved off of it immediately and now all I needed was some news to take the stock higher. I had $28K invested in options that were set to expire the next day completely worthless unless we got a move higher; but I knew my payoff for the gamble could be 20 times my investment if things went perfectly so I watched and waited studying the price movement to make sure it looked a bit dodgy to keep the shorts engaged.

About an hour before the market closed I noticed a big jump in the options; a quick 500% gain for me if I wanted to cash out. News had broke that a verdict was coming out after the bell from a major liability case against ISRG. The news had spiked the options; but the cash price wasn’t moving because it was waiting on the verdict itself. I decided to wait on the verdict as well because my chart said that it was going to spike up on Friday. After the close the verdict did come down and the stock traded up over $500. A win for ISRG and a win for my charts.

Long story short I sold my position on Friday near the cash price of $505 and took another in-the money position for this weeks options expiration when it dipped to $492 which I’ll probably sell Tuesday or Wednesday near $523 or higher. My profit last week on that small one day trade was $414K of which I rolled half back into this week’s trade.

It did surprise me greatly that I was the only trader in the market that saw this opportunity. I realized this by gauging the options chains volume on the open Thursday. Trades like this are a good example of why you should listen to me more often than not when I give you possible trade opportunities. Remember to never trade the news because 90% of the time its already baked into a stock’s price and always trust your charts because – Rule #7 “The Charts Precede the News”.

I’ll post another article tonight with a couple of good trade ideas for next week; and yes I see several more trades just like ISRG setting up.

In general just to give you a heads up; I expect a strong open for many stocks Tuesday with a hard reversal late Tuesday or Wednesday AM and a possible down week for some recent winners.

As always – study more than you trade and you will succeed – good luck – PTP –

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